Which Business Strategy is right for you?
Before ploughing ahead into this article, I suggest you first work through “Do you know where you are”; to get a feel for the trends in your industry opportunities and business strengths.
There are four Generic Business Strategies recognised by Michael Porter, and these centre on a business’ strengths that are either cost advantage or differentiation. These are then applied to either a broad or narrow scope at the business unit level.
Generally this is adopted where there is a large or broad market. The idea is to gain market share by being able to charge a low price for your product. To achieve this concentrate on improving process efficiencies, sourcing materials at lower price to competitors, outsourcing or vertical integration. This becomes a competitive space when a competitor lowers prices you need to be able to follow.
This strategy focuses on developing products that contain unique attributes which are valued by customers. In doing so the business is able to charge a premium price for the product. Generally because of the high user value, if input costs increase, a business can pass these costs onto the consumer as there are few substitutable products in the marketplace. Risks with the strategy are not moving with tastes and preferences of consumers or imitation by competitors.
Focus strategies concentrate on a narrow market segment and then tries to form an advantage through either price or differentiation. Businesses utilising this strategy usually have high customer loyalty and this can discourage competitors from entering the market.
Due to lower volumes there is less bargaining power with suppliers on prices and this can impact a low cost focus. Differentiation strategy however may allow these additional costs to be passed onto the consumer.
Don’t get stuck in the Middle
When deciding a strategy, try to stick to one of the four. An attempt to operate in all boxes may cause confusion to your customers on exactly what your business stands for. For example, if you are a differentiator of quality and then pursue a cost leadership strategy, your customers may question whether the quality of your product still exists (even if it is another product under the same brand). If you have products that may do well in different strategies, create separate business units and have different policies and cultures in each so that the image that is projected to the consumer is consistent. Think of clothing retail groups that offer different brands for different markets at different price ranges.
Above all consider the competitive environment of your industry and how this may influence the strategy you choose. Porters Five Forces is a great tool to use here.
Business Consulting | The Money Edge | Bundaberg